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Remarkable things about the strong rebound of Irish economy

The surprisingly strong rebound of the Irish economy over the past two years has been much commented on at home and abroad writes Oliver Mangan Chief Economist at AIB.

We have official National Accounts data from the CSO for the first three quarters of 2015. These show that Irish GDP grew at a steady pace of 7% over this period. This follows the rise of 5.2% recorded for Irish GDP in 2014.

These are exceptionally strong growth rates. What is particularly impressive is that on a quarterly basis, the economy has expanded by between 1.1% and 2.2% for seven consecutive quarters, stretching all the way back to the opening three months of 2014.

Thus, continuous robust growth has been evident in Ireland for two years now. A cornerstone of this impressive performance has been the strong growth in exports, which have increased at a double-digit rate over the past two years. This reflects the recovery in activity in our main export markets, the significant gains made in Irish competitiveness, the marked weakening of the euro, as well as the inflow of foreign direct investment.

However, the domestic sector of the economy is also recovering strongly. Domestic spending, excluding some elements associated with the multinational sector, rose by 4.5% in the opening three quarters of 2015, thereby maintaining the rate of growth seen in 2014.

Consumer spending rose by 3.5% in the first three quarters of last year, following the rise of 2% recorded in 2014. Notably, car sales rose by 30% in the last two years. Retail spending also rose strongly in 2015, although household spending on services has yet to recover.

Meanwhile, there has been a particularly strong rebound in business investment, albeit from a very low base. It grew by 25% in the opening three quarters of 2015, following a rise of 33% in 2014. Government spending has also risen in the past two years. The impact of the rebound in the economy can be seen in many indicators.

The budget deficit is falling rapidly, helped by buoyant tax receipts, which are likely to have risen by 10% last year. Exchequer figures due later today, are expected to show that the budget deficit fell to close on 1.5% of GDP last year. The deficit stood at 8% of GDP as recently as 2012.

Meanwhile, employment is growing by 3%, with the economy likely to have added around 60,000 full-time jobs last year. The unemployment rate has fallen to under 9% from 15% in 2012.

Consumer confidence has risen to its best level in over ten years. Two things are remarkable about the strong rebound of the Irish economy. First, the world economy is enjoying just modest growth as it continues to struggle to recover from the financial crisis of 2008-09.

Indeed, global growth slowed to its weakest pace in five years in 2015. Even better performing economies, like the US and UK, are growing at around one-third the rate of the Irish economy.

Eurozone growth is running at just 1.5%. Second, the strong rebound in the domestic economy has occurred in the absence of any real recovery in the key construction sector. CSO data show a rise of just 3% in construction output in the first three quarters of last year. House building remains at very depressed levels. The key question as we enter 2016 is whether the economy can sustain its strong growth performance going forward.

The signs look promising. The global recovery is expected to continue at a modest pace in the next couple of years, although there are some downside risks. Meanwhile, it is anticipated eurozone interest rates will remain at their current exceptionally low levels for a number of years. Construction should also emerge from the doldrums, with signs already of a pick-up in private non-residential building activity, as well as a rise in housing starts. Thus, while there may not be a repeat of the 7% growth in GDP seen in 2015, the economy looks capable of expanding by 4%-5% in the next couple of years, assuming the global economy can maintain its current moderate growth rate.

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